On Monday, 29 October 2012, the Supreme Court of the United States heard oral arguments in the first-sale doctrine case, Kirtsaeng v. John Wiley & Sons. This case involved the petitioner, Kirtsaeng, purchasing lawfully made copies of the books from Thailand and reselling these books in the United States. John Wiley & Sons asserted, and the Second Circuit agreed, that the first sale doctrine applies only to copies manufactured in the United States and does not apply to foreign made goods. In the amicus brief filed by KEI, we argued that the Second Circuit interpretation is not justified by the language of the U.S. Copyright Act and would result in considerable damage to the interests of the U.S. public and consumers (including, for example, the elimination of secondary markets; harm to libraries, the blind and museums; encouraging outsourcing of manufacturing overseas; and harm to U.S. businesses). Additional background to the case as well as KEI's amicus brief can be found here.

During oral arguments, Joshua Rosenkranz argued on behalf of the petitioner. Former Solicitor General, Ted Olson argued on behalf of the respondent, John Wiley & Sons, but ceded a portion of his time to the Solicitor General's Office. Malcolm Stewart argued on behalf of the Solicitor General and encouraged the Supreme Court to adopt a "middle ground" between Kirtsaeng's and Wiley & Son's positions.

During the petitioner's time for argument, Justice Ginsburg raised several questions regarding international exhaustion. She asks:

JUSTICE GINSBURG: And we are told that no country has adopted that international exhaustion regime, that most countries adhere to the national exhaustion regime, which nobody is contesting here. That is, if it's manufactured in the United States and sold in the United States, that copy belongs to the person who purchased it, end of case. But if the exhaustion doctrine applies only nationally, then your argument is asking for something that runs against the regime that is accepted in most places.

MR. ROSENKRANZ: Your Honor, I have a few answers to that. The first is it is not true that no country adopts national exhaustion. Congress adopted national exhaustion in sections 905 and 906 6 years after the statute was passed, as to microchips.

But second, Wiley is making the point that there is now a norm. They say most States -- most countries, that is. Back in 1976 Wiley is not even arguing that there was any international norm, much less that the drafters of the statute were focused on international norms; and the truth is that there isn't an international consensus around national exhaustion.
We know that for a fact. In 1994 when 125 nations got together, they -- they agreed to disagree on international copyright exhaustion principles, and they codified that disagreement, to each his own, in the TRIPS agreement.

KEI notes that parallel importation issues are controversial and currently being discussed in the context of the Trans-Pacific Partnership Agreement (TPPA) with heavy opposition to the United States' proposal that would eliminate parallel importation. Although Justice Ginsburg questions counsel for the petitioner on the system in place in the European Union (Mr. Rosenkranz notes that the E.U. uses a system of regional exhaustion, not national exhaustion), numerous countries have implemented systems of international exhaustion including, for example, Chile, New Zealand and Singapore, among others.

Justice Kagan questions Rosenkranz regarding whether his reading of the Copyright Act is that the first sale doctrine applies to nonpiratical copies. Here, Rosenkranz goes through the history of the 1976 Copyright Act.

JUSTICE KAGAN: So, Mr. Rosenkranz, is what -- is your theory of this statute essentially that this language means nonpiratical copies as that is defined by U.S. copyright law?

MR. ROSENKRANZ: That is right. And Your Honor, the reason was -- what was driving copyright owners crazy was this notion that there were lawless states out there that had no significant copyright protection. And we were applying their standards to products that were infiltrating the U.S. market. And one of the most important things to underscore here, which I think got lost in the Costco argument, is that the space -- that 602 does an enormous amount of work even with 109, the first-sale doctrine, carved out of it.

Copyright owners wanted three things out of the 1976 act with respect to importation, and they got two and a half of them. The first was what we've just been talking about, Your Honor. It was driving them crazy that there were lawless states out there; they gave the example of Russia, which -- where an agency approved the making and distribution within Russia of classic English language works. They got imported to the U.S. and they were competing with U.S. works, U.S. copies within our domestic market. And they got their wish to shut that down, to use U.S. law as the standard for those works.

Secondly, they got coverage for copies that were lawfully made but stolen. And this was the one ask that the film industry had. We see it in the colloquies. They rented films abroad. The films - ­that was their business model. The films would get stolen; and the U.S. market would be awash with stolen films. And so they wanted to shut down with the importation provision those stolen goods coming into the U.S. market.

And the third thing that they wanted is -­ is what's been dominating this debate. But it's only the third thing, and that was help dividing geographic markets, so that they could go after the rogue distributors, yes, but also go after the downstream sales. They got half of that. They got a cause of action against the rogue distributors. They did not get a cause of action that went downstream.

Rosenkranz also provides specific examples where Wiley's reading of the statute would result in unintended consequences. Rosenkranz points to a classroom teacher who could play a Beethoven record to her class if the record was made in the United States, but not if it were manufactured in Asia. He also discusses the implications for this case on the right to publicly display, noting that a cafe owner could purchase a photo and display it on her walls if the photo was made in the United States, but not if it were made in Asia.

Rosenkranz also points to the impact on the U.S. economy as the Second Circuit opinion is likely to result in outsourcing. He notes, "So a U.S. manufacturer who wants to sell into the U.S. market has this incentive to go and send jobs overseas. It's an irresistible incentive if the law is -- if this Court says the law is what Wiley says."

Of course, any exchanges between Justice Kagan and counsel for either side could be particularly important given that the last case the Supreme Court heard regarding the first sale doctrine, Costco v. Omega, split 4-4 and resulted in affirmance by a divided court. Justice Kagan recused herself in that case and though the facts of the present case are different, her vote could still represent the deciding one in this case. Notably, in a later exchange between Justice Kagan and Ted Olson reveals that with respect to the meaning of the language "lawfully made under this title" she "I find[s] this language a little bit perplexing, and I can kind of see it both ways"

During Mr. Olson's time for argument, the justices, in particular Justice Breyer, were particularly focused on the unintended consequences noted by Mr. Rosenkranz (and the amici that filed briefs in the case). Justice Breyer turned the line of questioning several times to the "parade of horribles" that could result if the Second Circuit interpretation--and the one advanced by Wiley & Sons--is adopted.

JUSTICE BREYER: Now, the only -- so there's plenty of meaning there. The question is what happens when he sells it to his bookstore and you or I go in and buy it and we want to give a copy to our wife when we get back to the United States. The question is, did - ­is that unlawful?

MR. OLSON: Well, we're -- well, if we're reading the provisions of the statute, is that copy -­ now, there are exceptions for the books that are brought in -
­JUSTICE BREYER: No, no exception I take it once I bring back five copies and I give one to my son.

MR. OLSON: Well, there are fair use exceptions and there's -­

JUSTICE BREYER: Oh, fair use.

[...]

JUSTICE BREYER: -- imagine Toyota, all right? Millions sold in the United States. They have copyrighted sound systems. They have copyrighted GPS systems. When people buy them in America, they think they're going to be able to resell them.

Now, under your reading -- now, this is one of their horribles, I gather, and I want to know your answer to it. Under their reading, the millions of Americans who buy Toyotas could not resell them without getting the permission of the copyright holder of every item in that car which is copyrighted?

MR. OLSON: There may be -­

JUSTICE BREYER: Is that right?

MR. OLSON: There may be just -­

JUSTICE BREYER: Am I right or am I wrong? Am I off base or am I wrong -- am I right?

MR. OLSON: There are other defenses, but that is not this case. This case is not -­

[...]

JUSTICE BREYER: Now, explain to me, because they're horribles if I summarize them, millions and millions of dollars' worth of items with copyrighted indications of some kind in them that we import every year; libraries with three hundred million books bought from foreign publishers that they might sell, resale, or use; museums that buy Picassos that now, under our last case, receive American protection as soon as that Picasso comes to the United States, and they can't display it without getting permission from the five heirs who are disputing ownership of the Picasso copyrights.

Those are some of the horribles that they sketch. And if I am looking for the bear in the mouse hole, I look at those horribles, and there I see that bear.

So I'm asking you to spend some time telling me why I'm wrong.

MR. OLSON: Well, I'm -- first of all, I would say that when we talk about all the horribles that might apply in cases other than this -- museums, used Toyotas, books and luggage, and that sort of thing - ­we're not talking about this case. And what we are talking about is the language used by the statute that does apply to this case. And that -­

JUSTICE KENNEDY: But you have to look at those hypotheticals in order to decide this case.

MR. OLSON: Well, and that's -­

JUSTICE KENNEDY: You're aware of the fact that if we write an opinion with the -- with the rule that you propose, that we should, as a matter of common sense, ask about the consequences of that rule. And that's what we are asking.

Justice Sotomayor also raised questions regarding the parade of horribles that could result from Wiley & Son's position regarding parallel importation and the first sale doctrine. She noted that these horribles could result in courts attempting to carve out exceptions to avoid these consequences that do not make sense:

JUSTICE SOTOMAYOR: [...] The parade of horribles is now causing the Solicitor General and at least one, if not two, courts of appeals to write exceptions into the language to take care of what they perceive as horribles.

Isn't it incumbent upon us to give the statute what is plainly a more rational plain meaning than to try to give it a meaning and then fix it because we understand that the meaning doesn't make sense?

Chief Justice Roberts also questioned Mr. Olson on the "horribles," pointing out that a fair use defense would not remedy all the consequences pointed to by the petitioner.

CHIEF JUSTICE ROBERTS: Well, which ones are -- I mean, I'm -- it seems unlikely to me that, if your position is right, that a court would say, it's a fair use to resell the Toyota, it's a fair use to display the Picasso.

MR. OLSON: It may be a fair use. It may be an implied license, for example, with respect to copyrighted items or trademarked items that appear in a product that was licensed abroad. The government has offered another alternative interpretation of the word "made," as putting it in the flow of commerce. That might deal with some of these situations.

But the point I guess I am making, Mr. Chief Justice, is that Congress was clearly intending to talk about the vast gray market problem.

Turning away from the parade of horribles, Justice Ginsburg questioned Olson on the potential consequence that Wiley & Son's proposed complete ban on application of the first sale doctrine for goods manufactured abroad:

JUSTICE GINSBURG: Mr. Olson, do you have an answer to the outsourcing problem and the charges that if you read the statute as you are urging, then you are inviting the outsourcing of manufacturing jobs?

MR. OLSON: There are several answers to that. One, that's Congress's concern. And -- and there is no evidence that that would really actually happen. And Congress was concerned with creating a segmentation of the market. But it's entirely speculative as to whether or not people are going to start manufacturing books or other items outside the United States.

Congress can address that if that should become a problem, but it's not something that was suggested as a part of what was taking place at that time.

The Solicitor General's office also participated in oral arguments and proposed a "middle ground." Justice Kagan sums up the government position succinctly:

JUSTICE KAGAN: So you are essentially saying that the appropriate way to read this statute, to make sense of all of its provisions, is to give the copyright holder control over the importation, to give Wiley the ability to go after this importer, Mr. Kirtsaeng, but to find a way to stop it there.

At the end of the time reserved for the United States, Justice Alito posed the question as to which result would be worse in the views of the Solicitor General's Office: the unintended consequences posed by Kirtsaeng or the elimination of market segmentation for Wiley & Sons. It was an interesting question given that the Solicitor General advocates for a middle ground, but that Wiley & Sons ceded a portion of its time to allow Mr. Stewart to argue. As an either/or choice, Mr. Stewart seems to concede that the consequences outlined by Kirtsaeng would be worse.

JUSTICE ALITO: Which of the following is worse: All of the horribles that the Petitioner outlines to the extent they are realistic, or the frustration of market segmentation, to the extent that would occur, if Petitioner's position were accepted?

MR. STEWART: Well, if they actually happened, then I think the -- the horribles would be worse. But, as I say, we -- we feel that we have offered a reading of all the statutory provisions together that would avoid both.

The other couple of things I would say as to why a first sale by itself -­

JUSTICE ALITO: If the -- if that middle ground is -- were found to be not viable, which of the two sets of consequences is worse from the government's perspective, or can you not say?

MR. STEWART: I would say that the consequence that all foreign-made goods, even if imported into the United States with the authorization of the U.S. copyright owner, are subject to continuing licensing requirements, etc., I would say that would be worse than the frustration of market segmentation that would occur under Petitioner's view.